Rental Depreciation: Deduct 3.636% of Cost Every Year

Marcus Reyes, a single filer in Atlanta, Georgia, buys a duplex for $400,000 and starts renting both units. His accountant asks one question that changes his whole tax picture: “What’s your land value?” The county assessment puts land at 17.5% of value, so $70,000 is land and $330,000 is building basis. Divide $330,000 by 27.5 and Marcus gets a $12,000 deduction every single year — a write-off against his rental income that costs him nothing out of pocket. At his 22% federal bracket, that’s $2,640 in tax he doesn’t pay this year, plus Georgia’s 5.39% flat tax saves another $647. That is the entire engine of buy-and-hold rental investing in one number: 3.636%.

The formula: (purchase price − land) ÷ 27.5

Rental depreciation is straight-line under the Modified Accelerated Cost Recovery System (MACRS) General Depreciation System. “Straight-line” means equal deductions each year — no front-loading, no back-loading. The recovery period for residential rental property is 27.5 years (IRC §168(c)). One divided by 27.5 is 0.03636, so you deduct 3.636% of your building basis annually.

The math has exactly three inputs:

1. Cost basis. Your purchase price plus the closing costs you can’t deduct separately — title insurance, recording fees, transfer taxes, legal fees, surveys. Not your loan amount, and not deductible items like prepaid interest or property tax (IRC §1012; Treas. Reg. §1.263(a)-2).
2. Land value. Subtracted out entirely. Land does not wear out, so it never depreciates (Treas. Reg. §1.167(a)-2). This is the step most first-time landlords skip — and it’s the one the IRS checks first.
3. Recovery period. 27.5 years for residential. 39 years for commercial or short-stay. That’s the divisor.

Building basis ÷ 27.5 = your annual deduction. For Marcus: $330,000 ÷ 27.5 = $12,000/yr. He will deduct that $12,000 for 27.5 years — a total of $330,000 in non-cash deductions over the life of the asset.

The four things searchers get wrong

1. Land is not depreciable — and you must prove the split

If you depreciate the full $400,000 purchase price instead of the $330,000 building, you’re over-depreciating by $70,000 ÷ 27.5 = $2,545 every year. That overstatement compounds into a bigger recapture bill at sale and an easy audit adjustment. The IRS expects a reasonable land allocation. The cleanest, most defensible method is the county property tax assessment ratio: if the assessor values land at 17.5% of total, you allocate 17.5% of your purchase price to land. An independent appraisal or comparable bare-lot sales also work. What does not work is “I guessed 5% because more depreciation is better.”

2. Depreciation starts at “placed in service” — rent-ready, not rented

Your clock starts when the property is placed in service: ready and available to rent, even if it sits empty (IRC §168). The trigger is “rent-ready and listed,” not “tenant signed.” If you finish the rehab and list the unit on April 10 but the first tenant moves in June 1, your depreciation begins in April. Two months of an empty, advertised unit still count. The flip side: time spent renovating before the unit is habitable does not count — those costs get capitalized into basis instead.

3. First and last year are prorated by the mid-month convention

You almost never get a full $12,000 in year one. Residential rental uses the mid-month convention (IRC §168(d)(4)): no matter what day of the month you place the property in service, the IRS treats it as mid-month. Place it in service in April and you get 8.5 months of depreciation that year, not 12. The IRS publishes the exact first-year percentage in Pub. 946, Table A-6.

Marcus placed his duplex in service in April, so his year-one deduction is $8,501, not $12,000. He picks up the missing months at the tail end — the deduction stretches into a 29th calendar year. Either way the full $330,000 gets deducted.

4. Improvements depreciate on their own separate clocks

When you replace the roof, install a new HVAC system, or add a deck, you don’t add it to the 27.5-year building schedule. Each capital improvement starts its own depreciation clock on the date it’s placed in service. A $15,000 roof installed in year 6 begins its own 27.5-year schedule in year 6 (residential building improvements are generally 27.5-year property). Appliances and carpeting are typically 5-year property; land improvements like fences and driveways are 15-year property. Repairs — fixing a leak, repainting — are deducted immediately and never touch a depreciation schedule (Treas. Reg. §1.263(a)-3 distinguishes a deductible repair from a capitalized improvement).

27.5 years vs. 39 years: residential vs. commercial and short-stay

The recovery period turns on how the property is used, not on what it looks like:

A property is residential for 27.5-year treatment when 80% or more of its gross rental income comes from dwelling units (IRC §168(e)(2)). But a short-term rental with an average guest stay of 7 days or less is treated as transient lodging — like a hotel — and drops to the 39-year commercial schedule. This catches a lot of Airbnb hosts off guard: the same physical house depreciates over 27.5 years as a 12-month rental but 39 years if you run it as a nightly vacation rental. The shorter the recovery period, the larger your annual deduction, so a long-term tenant is the more depreciation-efficient use.

Why depreciation is not optional: the allowed-or-allowable trap

The single most expensive mistake a landlord can make is not taking depreciation, thinking they’re keeping it simple or avoiding recapture. The tax code forecloses that move. Under IRC §1016(a)(2), your basis is reduced by depreciation “allowed or allowable” — the depreciation you took, or the depreciation you could have taken, whichever is greater.

Translation: when you sell, the IRS calculates your gain as if you had claimed every year of depreciation, even if you claimed zero. The depreciation portion of your gain is unrecaptured §1250 gain, taxed at a maximum federal rate of 25% (IRC §1(h)(1)(E)). So skipping depreciation gives you the worst of both worlds: no yearly $12,000 deduction and the full recapture tax at sale on depreciation you never enjoyed. There is no upside to skipping it.

Marcus holds the duplex 10 years and claims $114,000 in total depreciation (roughly $12,000 × 9.5 effective years). At sale, that $114,000 is unrecaptured §1250 gain. At the 25% maximum rate that’s up to $28,500 of federal tax on the recapture alone — but he deferred or saved far more than that across 10 years of $12,000 deductions, and his §121 primary-residence exclusion never applied because it’s a rental. If he 1031-exchanges into a larger property instead of selling, the recapture defers entirely (IRC §1031; 45-day identification / 180-day closing windows).

Worked example: Marcus’s full year-one and steady-state math

Marcus is single, in the 22% federal bracket (taxable income between $48,476 and $103,350 for 2026), and pays Georgia’s 5.39% flat state tax. His duplex grosses $36,000/yr in rent with $14,000 of operating expenses and $10,000 of mortgage interest.

This is the magic of the $12,000 deduction: Marcus collects $12,000 of positive cash flow but reports $0 taxable income because depreciation is a paper expense he never wrote a check for. The $12,000 deduction shelters $12,000 of real income from both the 22% federal and 5.39% Georgia tax — roughly $3,287 in tax saved per year. Over 27.5 years, that’s tens of thousands in deferred tax, partially clawed back later at the 25% recapture rate but with a decade-plus of compounding in between.

What most people miss: passive losses can be trapped

Depreciation often pushes your rental to a taxable loss even when cash flow is positive. Here’s the trap: rental losses are passive losses (IRC §469), and you generally can’t deduct them against your W-2 or business income. They suspend and carry forward until you have passive income or sell the property.

Three escape hatches:

• The $25,000 active-participation allowance (IRC §469(i)). If you actively participate (approve tenants, set rents, arrange repairs) you can deduct up to $25,000 of rental loss against ordinary income — but it phases out between $100,000 and $150,000 of modified AGI and disappears entirely above $150,000.
• Real estate professional status (IRC §469(c)(7)). If you spend 750+ hours and more than half your working time in real estate, your rentals become non-passive and losses flow freely against all income. High bar; documented hours required.
• Suspended losses release at sale. When you sell in a fully taxable transaction, all your trapped passive losses free up and offset the gain — including the recapture.

Marcus, with W-2 income under $100,000, gets the full $25,000 allowance, so his paper losses are usable now. A landlord earning $200,000 at a day job would see those same losses suspended until sale.

The decision lever

Your one controllable lever is the land allocation — and you should set it correctly the year you place the property in service, because changing it later is a Form 3115 accounting-method change, not a quick amendment. Pull your county assessment, apply the assessor’s land ratio to your purchase price, document it, and depreciate everything above the dirt. A defensible, slightly building-favoring allocation (within the assessment’s support) maximizes your 3.636% deduction every year while surviving an audit. Then file Form 4562 the first year, keep the schedule running, and never skip a year — because the IRS will tax you on it at sale either way.